An oligopoly is a form of a market where a specific industry is under the control by a small number of powerful sellers known as oligopolists. The dominance of the market by a few key players creates a lack of competition in the market which results in an increased cost of the goods and services being offered by that particular industry (Federal Trade Commission).
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Due to the lack of key players; the competition brings a certain level of transparency at the seller level where all retailers are aware of what the other is doing. This market is knit closely together that even the smallest of decisions by any one of the firm in it is influenced by other forms, and has the ability to impact other firms in a huge way. Having few players in the market might make it easy for a company to keep track of its competition, but it also has a downside.
Though there are only a few sources affecting the company, the amount of power they can exert onto the other companies is extremely large. Hence the level of strategic planning undertaken by oligopolists needs to consider and take into account the expected responses any of their market participants might generate as a result of their actions.
Strategy implementation is an extremely important task for interdependent industries and involves decision like whether they are going to be market leaders, whether they want to implement a new strategy before everybody else or wait and see how a particular decision for a rival pans out before implementing it. In industries where there is a lot of competition, the first mover and second mover advantage differs from an oligopoly set up. It can be quite often case that there are only two players in the industry so the level of competition might be not be cut throat but companies have to decide what market position will be more beneficial to their ultimate goal (Economics Online).
Though the major description of oligopoly is that the market is dominated by only a few players, however, there is a possibility that there might be a few small players involved along with the few major players in the market (Economics Online).
Oligolpoly has to offer several advantages along with disadvantages. Talking about its downside, it is not the ideal market from for consumers. It reduces the number of options available to them not to mention the fact that these form of highly concentrated market with the extremely reduced level of competition results in overall high priced products whose output is not very large. Also, it becomes easy for the major players to raise the barriers of entry in an effort to deliberately stop other players from entering the market.
It is said that oligopoly is potentially dangerous to the overall economic well-being. Furthermore, firms operating in oligopolies do not pay much attention to consumer needs, since consumers do not have a lot of options available to them; oligopolies have no fear of losing their customers and are often inefficient (Economics Online).
Despite all these disadvantages, oligopoly has certain benefits to offer as well. For oligopolies that adopt extremely competitive strategies, they become quite similar to the regular market structure where there is high level of competition which produces benefits like low and competing prices. The overall market might not be uncompetitive but the behavior of the firms within the market doesnâ€™t have to be. Another attribute of oligopolies is that they are innovative and often come up with new products and keep improvising their business processes which eventually is to the benefits of the consumer (Economics Online).
Promotional competition is extremely important when it comes to markets with differentiated products. The advertisement used by such type of firms can basically have two possible outcomes, to increase awareness and hence sales or to persuade the customers to switch the brand they are currently using (Hamilton). The important question to answer is that with billions being spent on advertising, when advertising becomes inefficient (Dukes).
Advertisement Impact- Oligopoly
Advertisement in oligopoly markets is somewhat different than the other markets. However it is heavily argued that that the efficiency and effectiveness of advertisements is totally dependent upon the level of product differentiation that exists within the market for there are many times when the consumers have varied preferences for certain product characteristics but are unaware of the characteristics of certain brands without the aid of informative advertisement. The advertisement activity uses the persuasive nature of the adverts which according to them has a long time effect on consumer and hence is uses to ensure that consumers do not shift to a competing brand (Cellini, Lambertini and Mantovani).
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In contrast to monopolies where there is perfect competition and advertisement is used to just generate awareness and not increase market share, oligopolistic firms have more to gain from advertising. The major benefit they reap from advertisements is that it helps them increase their overall market share and can also influence the demand of their product and cause it to rise. To attain both these goals, the firm has to properly establish the supremacy of what they are offering in terms of their products in comparison to their companyâ€™s competitors. While ensuring their customers that their product is better than their rivals, they need to ensure that they have a responsive plan to the competitorâ€™s advertisement efforts because as already discussed, a rival advertisement has the full potential of affecting the company almost as much if not more than the company who designed the advertisement for themselves. Hence it is these reasons that result in a high concentration of advertisements when it comes to oligopolistic markets.
On a wider spectrum, advertising might not produce results that show that customers have been impacted. On the other hand, it is also quite possible that advertising results in better and more enhanced consumer benefits as well as efficiency. When advertising actually reaps results and produces an increase in sales, and hence causes the overall production to increase, it often leads to economy of scale.
Hence advertisement just does not reaming a flashy media activity but has the power to effect one of the major financial goals of an organization- itâ€™s economy of scale. However, it always has to be remembered that throwing around the term advertisement is easy but it is an extremely costly activity. Hence advertisement may improve efficiency but its benefits always have to be weighed against the cost incurred to make a clear assumption of whether it is good for a company or not.
However, it is also important to remember that in oligopolistic markets, because there are a few key competitors, these are all major firms and they more often than not have the resources to spend on the important media activity of advertisement.
Advertisement in oligopoly eventually helps the customers in the decision making process. When there are not a large number of products for customers to choose from, they have the time to thoroughly research each of the limited available options before they make the purchase decision. The level of research drastically increases when the products bought are high involvement.
In these circumstances, the advertisements are extremely useful and are a low cost way of bringing all the information necessary to facilitate a buy to the customer. It is extremely beneficial for the customer for he does not have to put in any effort on their part to obtain the right information. The applications of this entire process where the customers are helped by advertisement rely on the fact that these advertisements have to be designed so as to portray information and nit just to attract customers.
The importance of informative advertising reaches a new height in this case for people are not interested about knowing what options they have, the in all probability are aware of the options available to the for these options are so few. The advertisement needs to be such of a kind that it tells about the attributes of the product and not about its mere existence. If this form of advertisement is adopted by firm in an oligopolistic form of market, they are sure to benefit from it and so will their customers which will enhance the overall efficiency of the firm.
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